Which item is classified as a cash deposit for custodial credit risk purposes?

In the context of custodial credit risk, a cash deposit refers to assets that are readily available for withdrawal and are considered equivalent to cash for purposes of investment and liquidity assessment. Negotiable orders of withdrawal (NOW) accounts fit this definition as they allow the account holder to withdraw funds on demand, similar to a checking account, but may also earn interest.

NOW accounts are deemed cash deposits because they meet the liquidity criteria and can be readily accessed without any restrictions or penalties. This classification is vital for understanding exposure to custodial credit risk, which refers to the risk that an institution holding funds may not be able to return those deposits in full.

The other options do not qualify as cash deposits for custodial credit risk purposes. Guaranteed investment contracts are structured investments with fixed returns over time, posing a longer-term investment risk. Cash equivalents, while generally liquid, refer to short-term investments that are easily convertible to known amounts of cash but do not encompass the broader category of deposit accounts. Commercial paper, being an unsecured short-term debt instrument issued by companies, does not fall under the category of cash deposits but represents a liability rather than an asset readily available for withdrawal. Therefore, the identification of NOW accounts as cash deposits aligns with the definition essential for assessing custodial